Thread by @taylorawelch

Busy week behind me and feeling generous...

Let's talk business acquisition. I'm up to 7 brands and here's how I buy them (quick thread to break it down):

First - we can't talk about funding or mechanics until we talk about deal flow. You must develop a single answer for when people ask you if you're interested:

Yes.

That's the answer... deal flow is the single metric that will break all the other metrics.

Once you have OPTIONS to look at, it's time to organize them into two categories:

1) Strategic
2) Cashflow

Here's the difference: a cashflow business is something I buy purely for the cashflow. I want the yield to support the investment, basic.

A strategic business is a business that, while it might provide cashflow it is strategic in enhancing other businesses in my portfolio.

Example: a roofing company.
We're rehabbing 60 houses right now... a roofing company will decrease cost and is thus strategic.

When you're just starting out -- everything is cashflow. As your portfolio grows you are able to pick up strategic buys that will boost the returns of everything else in portfolio.

This is where you want to get to eventually...

Once they're organized it's due diligence time.

We will lock up option the buy with an LOI and give 60-90 days to look through the financials and run analysis.

Most deals won't make it past this LOI phase. That's okay -- better to avoid a bad deal then get stuck with it.

During this time you can also start working on negotiations for the actual acquisition...

My 3 favorite ways to buy:
-earn in
-baseline
-equity flip

1// Earn-in

The most basic... a business is doing $1m annual.

You have the skillset to make it $4m annual.
You create an arrangement where the owner grants you 10% of equity once the business hits $4m or in some cases less (10% trade for a doubling of business is great).

2// Baseline

This is where you agree on a pre-determined amount of profit and everything underneath that profit is 100% to the current owner...

Everything above that amount is an equity split. Essentially a preferred return where the first owner is cut in first.

3// Equity flip

Most business owners are able to get something started but don't know how to grow it or stabilize it. One of my favorite ways to fund an acquisition is flipping in and out of equity position.

Let's say business does $1m annual @ 25% margin...

Business is valued at $500k because it's so low topline & dependent on current owner. If it's a STRATEGIC buy — I can go in and run the current operation through one of my other companies.

In first 90 days I can get the business to let's say $2m topline and 50% margin.

Now the business valuation is different, closer to $3m — and let's assume I 'purchased' 80% of the business with a 50% LTV on owner finance..

That means owner financed 50% of it on a, let's say 36m payout.

So $500k...
$250k owner financed.
I need $250k.

But I defer the downpayment for 60 days. Which gives me time to run through my system/portfolio.

Follow me here so you catch it:

Here's the chain of events:
-acquisition signed @ $500k value 50% DDP
-60 days, revenue bumped to $2m annualized
-valuation @ 3x margin = $3m not $500k
-I owe $250k for the original acquisition
-I 'flip' out 10% of my equity to a cashflow buyer

-they pay $300k for 10%
-I pay $250k to original owner
-original owner carries their 20% still which is now worth $600k

The owner made money selling to me.
I made money buying.
And now have 70% of a business cashflowing ~$1m/year.

Original owner paid off in 36 months and my CoC is infinity due to creative deal structure.

Read this thread 17 times because it's about as priceless as you can get.

Love you guys happy Saturday.
PS One take - forgive typos.

PS account is @taylorawelch and I'm very good at growing businesses quickly -- if you want to partner up send me a DM and we can talk about making you money...

I only consult 1:1 with equity/portfolio partners these days so be prepared to carve out some equity..